In his latest slidepack, BofA's chief technician Paul Ciana sees nothing but head & shoulder reversal patterns in virtually every currency pair and rate chart: i.e., the unwind of "Trump trade." As he writes in a just released note, "many US dollar and euro crosses, US rates, US 2s10s and US 10y TIPS have just formed or are developing a head and shoulders reversal pattern. The breadth of these patterns suggests the January correction of the 4Q16 trends will continue in 1Q17, or at least delay a continuation of stronger USD and higher rates."
This appears to be the chartist validation of the recently concluded Trumpflation trade, which is now being appreciated by technicians and other squiggle-drawers everywhere.
As Ciana further notes, FX crosses have broken more necklines, while US rates are still forming the right shoulders. These patterns are confirming bearish RSI divergences and TD Sequential signals.
First, looking at FX, BofA has spotted head and shoulders in USD and euro crosses. Bearish patterns have formed in US dollar indices such as the DXY and BBDXY. Crosses showing this technical reversal pattern include CCN+1M, USD/SGD, KWN+1M, EUR/RUB and EUR/NOK. Two crosses, EUR/USD and EUR/GBP, are still forming a right shoulder. Of note, Ciana says that unless the patterns are cancelled, he expects the DXY to slide to 97.86 and the EURUSD to rise as high as 1.108.
The same is applicable to rates, where right shoulders are still forming: lower rates technical patterns are developing, but they have yet to be confirmed by any neckline breaks. We see patterns starting to take shape on the daily chart of US 2s, 5s, 10s, 30s, US 2s10s and US 10y tips. Here, again, unless the patterns are cancelled, the 10Y and 30Y could drop as far as 2.03% and 2.65%, respectively.
Some of the more notable formations:
DXY breaks neckline and begins oversold bounce
- Price action ending January broke down below technical support and the neckline of a head and shoulders top at the round number of 100.
- There is technical risk of a larger retracement to the 200d moving average support at about 98.
- Provided the DXY remains below the right shoulder highs and 50d moving average of 101-101.50, this technical top pattern remains influential and bearish in the near term.
EUR/USD attempts to confirm H&S bottom
- Spot EUR/USD is attempting to break the neckline at 1.08 to form a head and shoulders bottom.
- A close through 1.08 is bullish and points up to the declining 200d at about 1.10, 1.1080 and possibly 1.1255. The 50d sma should catch up to offer support.
- A drawback to this pattern is the lack of bullish (overbought) momentum in the rally from the 1.03’s double bottom. The next rally should produce an overbought trend to increase conviction.
EUR/GBP forming right shoulder
- EUR/GBP began rolling over from a lower high starting in February. This may be the right shoulder of a head and shoulders top.
- Strong support at .83300 from the neckline, trend line and 50d moving average must be broken to confirm the top.
- A break below support suggests EUR/GBP will fall to about .78500.
US 5-year yield
- A close below 1.84% breaks the neckline and calls for a correction to 1.65%. A full technical correction could reach 1.5%.
- The market has rejected 2% multiple times (top of the right shoulder) and it remains key resistance. In the shorter term, the 50d SMA at 1.925 is also resistance.
US 10-year yield
- A close below 2.37% breaks the neckline and calls for a correction to about 2.15%. A full technical correction could approach 2.03%.
- Declining trend line resistance from the highs of the head and right shoulder remain a level to watch to void the developing pattern. (As of February 6 it is 2.5325% and declines .0030 each trading day)
US 30-year yield
- US 30y yield has remained sideways at the peak of the right shoulder, showing more resilience to a decline.
- A close below 2.93% breaks the neckline and calls for a correction to 2.78% and possibly 2.65%.
- A breakout through 3.13% could void the pattern and push the 30yr yield back to the recent 3.21% highs.
US 10yr TIP
The right shoulder of a head and shoulders top remains under development.
A close below neckline support at .32 suggests a deeper technical decline with .21 being the next target. Given the height of the top pattern, a deeper decline is technically possible to .09.• There is strong resistance at the 50d SMA of .46 that is also helping to form the right shoulder.
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And so on, almost as if everything has become just one trade, despite the so-called collapse in correlations.
Finally, here is a shorthand summarizing all the charts above, and various other H&S charts, as well as implied targets should the patterns continue.